A couple of months ago it was clear, according to statements from different members of the national Cabinet, that the “recipe” the government had for economic growth, in the short term, was based on the expectation that private investment flows (domestic and foreign) were going to accelerate.
From the official point of view, a friendly speech to business leaders, a much higher respect for institutions and republican rules, the eliminations of restrictions to exchange foreign currencies, an agreement with hold-outs, the adjustment of relative prices (peso devaluation included) and the decrease in exports taxes created a combination that would be enough to assure an investment boom in the short term.
But, after more than eight months since the new government took office, the investment boom has yet to arrive. One explanation for that could very well be that there are still some macroeconomic imbalances, which were inherited from previous administration, that the current administration did not solve yet.
The thing is that even though the new government has made huge improvements in many qualitative aspects (the ones named in the first paragraph of this piece), the improvements from a quantitative point of view have not been so impressive. Except for the agreement with the holdouts, the eliminations of restrictions to exchange foreign currencies and the slashing of exports taxes, the government has only made gradual improvements. And they haven’t been able to clear the doubts that still exist regarding the possibilities to solve the inherited macroeconomic imbalances.
The fiscal deficit hasn’t declined, inflation is too high, the peso is still overvalued against the dollar and the increase in energy prices is on hold after the decision taken recently by the Supreme Court.
In this context, there are business leaders (locals and foreigners) that still today have some doubts about the current and the future macroeconomic situation in Argentina. These uncertainties represent probably the best explanation of why those business leaders are reluctant on the possibility of investing big in Argentina.
Faced with this situation, the government decided to follow what we could define as a plan B, which basically consists of using a more expansive fiscal policy and, at the same time, launching a tax amnesty. The latter represents not only a tool that could push domestic economic activity by itself, but also a tool that could be used as a financing source to cover the more expansive bias of the fiscal policy. The relative scarcity of investments during the first half of the year led the government to recalculate its strategy for the economy to grow again in the short term.
Even though is true that an economic growth strategy based on investment looks much more robust and sustainable than a strategy based on a tax amnesty and higher public spending, it is also true that the probabilities that the economy will grow again at some point between the end of 2016 and the beginning of 2017 are high. It is, however, important to understand that the new strategy is useful only for the short term and sooner or later it will have to be substituted for another one that will have to be based on a fast and sustainable increase in the flows of investment.
What is the recipe for sustainable growth in the investment flows, in particular, and in the GDP, in general? Even though there isn’t one single right answer, the countries that have grown the fastest and have developed earlier seem to share some common factors (not only economic, but also social and institutional), some of which deserve to be mentioned.
From a social point of view, the common factor is the presence of social majorities with a shared vision around basic concepts (what kind of country/society do we want be?) that stays stable over time (it does not work if that shared vision changes systematically with the arrival of a new government). In this respect, the 2017 midterm elections are a crucial test. From a political point of view, the common factor is the respect for institutions that serves to limit all the excesses and deviations (from the government and/or the private sector) in relation to that shared social vision. And from the economic point of view, the common factor is the macroeconomic stability, in general, and the nominal stability, in particular, as a tool to generate the conditions that can increase the long term savings in local currency and, consequently, the investment flows in human and physical capital.
Obviously, the preponderance of these factors is not the same in all the countries that grow and develop sustainably, but in all the cases there is something from each one.
The new government now faces a huge challenge in following the path that developed countries have already followed. It’s a long and hard road ahead and, therefore, getting through it will require effort from everybody. The earlier we start, the better.